Industry sector poised for a near-term revival as investors act to capitalise on favourable trends in Nigeria

Founded on its diverse agricultural base, abundant mineral and petroleum reserves, and a young and growing population of workers and consumers, Nigeria presents considerable potential to return high yields on investment in manufacturing segments. While the discovery of hydrocarbons and rising crude prices created a dependence on export receipts and tax revenues and marginalised industry’s development, the crash of the global oil market in 2014 helped to refocus public policy on economic diversification and non-oil industries. A series of recent policy documents have set ambitious goals for sector development and outlined discrete, actionable strategies to match those ends. Critically, the administration has introduced a range of incentives to launch and broaden activities in various manufacturing segments, including agro-processing, biofuels, cement and automobiles. Although manufacturers have struggled recently with currency volatility, a chronic foreign exchange (forex) shortfall, and gaps in water, transport and electricity distribution systems, these incentives, as well as a planned surge in public spending on infrastructure, should help to accelerate investment and growth across a range of industrial activities.

Structure

In 2014 following the GDP rebasing exercise, the National Bureau of Statistics (NBS) began to recognise 13 distinct manufacturing segments in its economic reports, ranging from automobiles to plastics. Industrial activity as measured by GDP has long been concentrated in just three such categories – food, beverages and tobacco; textiles, apparel and footwear; and cement – that, according to local newspaper Daily Trust, “kept the sector afloat” until the early 2000s. The trend has persisted to the present, as over the period 2013-17 these three sub-segments accounted, on average, for 46%, 21.4% and 8.1%, respectively, of all manufacturing output, and taken together, they constitute roughly three-quarters of the market. The remainder includes significantly smaller ventures in non-metallics, plastics and rubbers, and wood derivatives. A study published in the summer 2017 volume of The Journal of Developing Areas indicates that such activities are concentrated in Lagos and Kano States, home to the country’s two largest cities, which accounted, respectively, for 20% and 16% of all manufacturing value in 2013. Moreover, a large share of industrial activities, as measured by labour force instead of value, are concentrated in Katsina, the country’s fourth-largest population centre, which sits just south of the Niger border.

A collaborative survey distributed by the NBS and the Small and Medium Enterprise Development Agency of Nigeria (SMEDAN) elaborate on this distribution. Their report estimates that micro-, small and medium-sized enterprises (MSMEs) – defined by SMEDAN as comprising, respectively, fewer than 10, 10-49 and 50-199 persons – employed 84% of working Nigerians in 2013. Moreover, the survey assessed that manufacturing MSMEs accounted for 13.7% of all MSME employment, suggesting that such small firms, especially micro-enterprises, employed 11.5% of the active labour force. The World Bank estimated that same year that 11.8% of employed Nigerians were working in industry, indicating that large businesses carry out just a fraction of all sector activity. That share represents a significant increase from the 8.5% figure recorded in 2007, though it is also marks a steep drop-off from the decade high of 14.1% in 2014, and industry’s employment share has since declined further, to 11.6% in 2017.

Oversight

The manufacturing sector is overseen chiefly by the Federal Ministry of Industry, Trade and Investment (FMITI). Originally known as the Ministry of Commerce and Industry, FMITI was restructured in 2011 to adopt growth strategies that will help the country to follow the growth trajectories of more developed states like Malaysia, Singapore and the United Kingdom. To do so, the ministry implements policies to attract domestic and foreign investment, facilitate bilateral and multilateral trade deals, boost industrialisation and support the growth of MSMEs. FMITI works alongside the Nigeria Export Processing Zone Authority (NEPZA), which was created in 1992 by the NEPZA Act and charged with a mandate to establish, licence, regulate and operate free zones (FZs) that enable investment in local production conducive to diversifying the economic base, generating employment and encouraging exports. Among the activities permitted under individual zone regulations are manufacturing, warehousing, duty free goods handling, banking and other financial services, international commercial arbitration services and special import operations.

The authority currently oversees 13 active FZs, including seven clustered in Lagos State; another 20 facilities are under construction, waiting for titles or sponsors, or still in pre-development. Of the operational sites, the largest are the Dangote Industries Free Zone and the Lekki Free Trade Zone, both in Lagos, as well as Cross River’s Calabar Free Trade Zone, which house, respectively, 70, 34 and 35 firms. Per a July 2018 report in Bloomberg, the Lekki site is set to expand dramatically with the construction of Dangote’s newest and largest refinery, which is expected to lead the way in streamlining domestic gasoline and diesel production and reducing the country’s dependence on costly fuel imports. “The coming onstream of new refineries, starting with the Dangote refinery by 2019, shall provide backward integration and locally available raw materials to the chemical value chain,” Jean-Marc Ricca, managing director of BASF West Africa, a subsidiary of the world’s largest chemical manufacturer, told OBG. In addition to licensing new facilities, such as the $2.5bn trio of development sites announced in December 2017, the NEPZA and the Nigeria Customs Service have also appointed a technical committee to reduce bottlenecks and harmonise operations among existing facilities.

Industrial Policy

Foremost among the strategy documents guiding industry’s development are the Nigerian Industrial Revolution Plan (NIRP), the National Enterprise Development Programme (NEDEP) and the Economic Recovery and Growth Plan (ERGP) 2017-20.

Recognising industry as a key driver of economic modernisation, the NIRP was unveiled in February 2014 as a roadmap to spur industrialisation, raise annual manufacturing revenues by N5trn ($16.2bn) and increase the sector’s GDP contribution to 10% by 2017. In so doing, the plan would create jobs, generate wealth, diversify the economy, reduce imports, multiply exports and broaden the tax base. The plan means to achieve those aims by leveraging competitive advantages that Nigeria already enjoys, particularly in agro-processing, metals and solid minerals, hydrocarbons, housing construction, home and consumer goods, and some services. Exploiting those edges, in turn, would be enabled by seven different interventions, including improving power and transport infrastructure; matching technical and vocational training to labour market demands, particularly for youth; incentivising innovation and enforcing intellectual property law; improving the ease, time and predictability of doing business; raising product and process standards; encouraging local patronage through an expansion of the “Buy Naija” campaign and promoting “made in Nigeria” goods; and lowering the cost of borrowing credit.

The NEDEP was launched in tandem with the NIRP, on the predicate that MSMEs, and particularly micro-enterprises, are integral elements of the economy. The programme estimates that such businesses produced 47% of GDP and employed three-quarters of the active workforce in 2012, and concludes that their success will entail more broadly shared and inclusive growth.

With the primary aim to create 1m jobs in MSMEs per year, the NEDEP aims to mitigate or eliminate the conditions that drag on MSME development, by improving their access to affordable and sufficient credit; tightening supply chain linkages; broadening access to physical and virtual markets; using clusters to encourage knowledge spillover and reduce the costs of rent, transport and electricity; facilitating the formation of cooperative societies and trade associations; providing technical and vocational training to bridge employer-employee skills gaps and embedding an enterprise development framework in universities across the country.

Broader Growth

The ERGP came about following the crash in the global price of oil and the 2016 recession the crash precipitated. The plan puts forward strategies to reestablish macroeconomic stability, prioritise non-oil growth, enhance competitiveness with better infrastructure and an easier business climate, invest in human capital and increase the accountability, transparency and cooperation between federal and sub-federal government agencies.

With regard to manufacturing, the ERGP reiterates many of the targets outlined in the NIRP and the NEDEP and uses their successes to propose more ambitious development. Broadly, the ERGP focuses on strengthening forward and backward linkages between industry and other sectors, substituting local content for imported raw materials and machinery, reviving and launching special economic zones and export processing zones, improving forex earnings and investing in research, development and innovation. The ERGP projects such steps to increase industry’s growth rate and employment share by 8.5% and 8%, respectively, between 2017 and 2020.

Performance

In the midst of long-term and robust growth in the global price of crude oil, intense investment in upstream hydrocarbons, coupled with the country’s growing reliance on crude as source of fiscal revenue and forex earnings, diverted resources away from Nigerian manufacturing and left the sector bereft of capital. Per data from the World Bank, the manufacturing sector’s share of total GDP – expressed here in constant 2010 US dollars in order to better reflect Nigeria’s new, 2010 GDP benchmark – fell from 52% in 1981 to 6.5% in 2010. Even as the economy at-large grew by nearly three-fold over the same period, from $124.9bn to $369.1bn, the real value of manufacturing activity shrank considerably, from $64.9bn to $23.8bn.

Industry began a tentative recovery from this decades-long slide at the end of the 2000s. According to the ERGP, the sector recorded an annualised growth rate of 13.3% between 2010 and 2015, nearly three times higher than the economy-wide rate of 4.8%. In 2014, moreover, the World Bank measured manufacturing activities’ GDP share at 9.6%, against the 8.5% contribution derived from oil rents.

Both in raw terms and as a GDP share, output contracted slightly in the two following years, anchored in the broader economic slump and the weaker naira. Many manufacturers rely on forex to import intermediate goods and raw materials, and a shortage of such currency prompted the Central Bank of Nigeria to ban 41 imports in June 2015. The decoupling of the naira from the dollar one year later precipitated its rapid depreciation and exacerbated the forex shortage. However, while industry’s economic contribution ticked downward to 9.4% in 2015 and 8% in 2016, output remained relatively stable, and that figure grew to 8.74% in 2017 to help propel Nigeria out of its recession.

Figures for industry’s share of exports further attest to the long-standing economic hegemony of crude oil. Manufacturing accounted for 0.13% of exports receipts in 1981 and this remained largely stable through 2000, when industrial wares comprised a 0.21% share of exported goods. The dividend on manufactured products rose over the course of the following decade to contribute a high of 6.7% of export value in 2010. Its share then fell in 2011 to 2.5%, recovered to 6.5% over the course of 2014 and had plunged again to 2.2% by 2017. Notably, though, manufacturing has significantly improved its terms of trade (TOT) in recent years. In 2016 industry’s TOT stood at 3.9%, indicating that spending on processed goods was over 25 times higher than industrial export revenue. In the first half of 2018 TOT improved to 21%, as increases in the quarterly value of imports have been greatly exceeded by growth in receipts from manufactured exports. This shift in the import-export ratio speaks to one of the short-term upsides of unpegging the currency. Taiwo Ayodele Adeniyi, the CEO of Vitafoam, a Lagos-based polyurethane manufacturer, told OBG, “The depreciation of the naira has led to increased demand from neighbouring countries for Nigerian products like foam, which has resulted in increased cross-border trading.”

Target Industries

The ERGP identified six investment entry points – food, light manufacturing, textiles, minerals, petrochemicals and the construction of new industrial parks – where businesses can take advantage of an existing experiential base, the large working-age population, abundant resources and growing consumer demand. In June 2018 local media reported that the administration hopes to secure $9.24bn in private capital investments in those segments by 2020, to pair with $400m in scheduled public spending. This sum is projected to create 300,000 new jobs across the country’s six geopolitical regions.

Food, Beverages & Tobacco

Chief among these targets are agro-processing and agro-allied activities, which already comprise the country’s largest manufacturing segment. Under its Agriculture Promotion Policy (2016-20), the Federal Ministry of Agriculture and Rural Development (FMARD) has looked to secure private investment in a nationwide network of 14 staple crop processing zones (SCPZs), which should serve to reduce post-harvest losses and add value to local yields by linking farmers in high output areas to manufacturing plants. The first such cluster, a $1.1bn cassava processing facility in Kogi State, initially secured anchor funding from the US agricultural conglomerate Cargill, though the project has since been taken over by Nigeria’s own Union Dicon Salt and the Nigerian National Petroleum Corporation, which intend to produce biofuels there. Moreover, Bloomberg reported in October 2017 that an unnamed Turkish investor had agreed to provide an initial $250m for an SCPZ in Niger State, which, upon completion, will be operated by its funder and process 750,000 tonnes of crops annually.

Cement

In June 2018 BUA Group, a local food and infrastructure producer, projected local cement production to exceed 45m tonnes in 2018, representing a 1400% increase in per annum output over 2008. According to BUA, the subsector’s new self-sufficiency is saving the country roughly $2bn annually in imports and accruing new forex through regional exports. Moreover, the 2018 Appropriation Act’s commitment of N2.9trn ($9.3bn) to capital expenditure, particularly on power and transport infrastructure (see Transport chapter), is expected to further buoy the segment’s value. To that end, BUA broke ground in August 2017 on plans that would double production at its Okpella facility, then followed up in July 2018 by beginning an expansion that would treble the output of its plant in Sokoto, which is particularly well-suited to producing exports to Niger. Meanwhile, Bloomberg reported in May 2018 that the country’s two largest cement makers, the Dangote Group and Lafarge Africa – a local subsidiary of Swiss giant LafargeHolcim – are raising funds to expand production and take advantage of higher infrastructure spending across sub-Saharan Africa.

Incentives

The Nigerian Investment Promotion Commission and the Federal Inland Revenue Service (FIRS) published a compendium in October 2017 detailing the broad portfolio of tax, tariff and export incentives intended to draw private capital into priority industries. The FIRS wholly exempts investments in solely export-oriented businesses and companies whose supplies are exclusively used as manufacturing inputs from tax dividends. Similarly, manufacturing firms with turnover less than N1m ($3230) are taxed at 20% for their first five years of operation, down from a corporate rate of 30%. More narrowly, FMITI offers a 60% repayment of interest on credit borrowed for the purpose of cassava production and processing, while FMARD provides loan guarantees of up to 75% for the production of designated crops. Companies that sign onto the administration’s backward integration policy on sugar development are subject to reduced duties on raw sugar imported for processing, while iron and steel billets, hot rolled sheets and coils may be imported duty-free. Elevated duties also protect automotive manufacturers from imports of new and used vehicles.

Outlook

Although recent years have been challenging for industry and manufacturers in Nigeria, the sector is poised for a near-term revival as investors act to capitalise on favourable trends. “The recovery of GDP growth rates and improving consumer discretionary spend, along with increasing urbanisation rates, should be a source of optimism for Nigerian manufacturers,” Raymond Murphy, CEO of Mouka Foam, told OBG. Coupled with the country’s broad resource base, the large and growing working-age population and the government’s renewed commitment to diversifying the economy through industrial development, conditions are right to achieve the ambitious output, employment and export rates proposed in plans like the ERGP. Government policy will support mid- and long-term growth through an array of tax and tariff breaks, reduced red tape, and protectionist measures aimed at fostering nascent industrial firms, while ongoing infrastructure investment in roads, rail and utilities should alleviate the chronic supply challenges faced by local manufacturers.